Supreme Court: In a case where the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account and the Assessing Officer had made proportionate disallowance of interest attributable to the funds invested to earn tax free income by referring to the average cost of deposit for the relevant year, the bench of Sanjay Kishan Kaul and Hrishikesh Roy*, JJ enquired about the law which obligates the assessee to maintain separate accounts.

The ASG, however, could not provide a satisfactory answer and relied upon Honda Siel Power Products Ltd. v. DCIT, (2012) 12 SCC 762 to argue that it is the responsibility of the assessee to fully disclose all material facts. The cited judgment mainly dealt with re-opening of assessment in view of escapement of income.

Not accepting the unsatisfactory answer by the ASG, the Court held that

“An assessee definitely has the obligation to provide full material disclosures at the time of filing of Income Tax Return but there is no corresponding legal obligation upon the assessee to maintain separate accounts for different types of funds held by it.”

Stating that in taxation regime, there is no room for presumption and nothing can be taken to be implied, the Court concluded that,

“The tax an individual or a corporate is required to pay, is a matter of planning for a tax payer and the Government should endeavour to keep it convenient and simple to achieve maximization of compliance. Just as the Government does not wish for avoidance of tax equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue.”

[South Indian Bank v. CIT, 2021 SCC OnLine SC 692, decided on 09.09.2021]

Read the full report on the case here

Interest free funds not kept in separate account. Can proportionate disallowance on interest under Section 14A of IT Act be allowed? SC explains

Judgment by: Justice Hrishikesh Roy

Know Thy Judge | Justice Hrishikesh Roy

Appearances before the Court by:

For Appellants: Senior Advocates S. Ganesh, S.K. Bagaria, Jehangir Mistri and Joseph Markose,

For Respondent/Revenue: ASG Vikramjit Banerjee and Senior Advocate Arijit Prasad

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